Why The Cost Of Construction Is An Important Economic Indicator

November 25, 2022

While there are many obvious indicators that point to the health of the economy, construction, and its related costs.

Are often overlooked as one of the most important as they can be used to measure both current and future market trends

A 2014 study by Market Realist examined the data related to construction spending from the 1950s to the 2008 crash. They concluded that America’s builders delivered nearly 60% fewer housing starts during the lowest points of the recession versus over 2 million when it was experiencing the peak of the economic boom.

Forbes reporter Jonathan Ponciano said, “The cost of building or renovating a structure, whether residential or commercial, can tell us a lot about what’s happening with the economy. In times of prosperity, when things look good and people feel confident, they will invest in construction projects. When times are tougher and the economy looks like it’s headed for a downturn, people will opt to wait, hoping the market will improve.”

How is Construction Spending Measured?

Now that we know that construction spending is an important factor in judging the economy, it begs the question – how is it measured?

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Typically, it’s measured by the amount of construction that is actually taking place at any given time. This usually includes structures such as bridges, buildings, roads, and other infrastructure projects which are reported on a quarterly basis.

What Information does the VIP Report Include?

The VIP report provides monthly estimates for the total amount of money spent on construction in the United States. A survey that is authorized by the United States Code, Title 13, covers construction work done on:

Public Construction

Encompassing both state and federal construction expenditures, these projects consist of work done for school and government buildings and other public buildings. This also would include spending on infrastructures such as roads, bridges, and the like.

Private Construction

The private construction sector is generally broken up into two categories: residential construction and commercial construction.

Residential Construction

Residential construction, which accounts for nearly half of all construction spending, consists of the entire U.S. housing market. From multifamily homes to single-family properties, new construction is tracked.

Commercial Construction

On the other hand, commercial construction includes any project that isn’t residential such as shopping centers, factories, offices, hospitals, and sports facilities.

The estimates offered in this report include the cost of both materials and labor, the cost of architectural and engineering, overhead costs, contractor’s profits as well as interest and taxes paid.

Why Construction Spending is a Reliable Indicator

In and of itself, construction spending doesn’t necessarily affect the financial markets, however, what it does do is provide insight due to its close tracking with gross domestic product (GDP), which is arguably the strongest economic indicator. When surveying the economy, economists use the GDP to measure economic growth as well as its associated health. When it’s moving in a positive direction, the economy is healthy and when it’s going south, the economy is not doing so great.

Brady Bridges, a real estate market expert and owner of ResideFW.com, commented “Construction spending is one of the most reliable indicators for changes in GDP because when people feel confident about the future, they are willing to put their money into the economy in order to invest in projects. When GDP starts to dip, construction spending follows suit. This makes GDP and construction spending barometers of economic health that can be used together to help economists predict where the market is headed.”

By utilizing the VIP report, you can get an idea of how construction spending is trending and use that information to help you decide when the best time is to invest or when it might be prudent to sit back and wait until the market turns around. Construction spending can be a powerful economic indicator and one that should not be overlooked when making any major financial decisions.

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